Does Payment For Order Flow To Your Broker Help Or Hurt You?
- 156 Downloads
The presumption is that a broker executing a stock trade for a retail investor will get the investor the best possible price execution for the transaction. In fact, the broker often sells the retail investor’s trade to an intermediary for cash payment. The broker’s motivation to generate dealer profits seems to overcome the broker’s fiduciary responsibility to obtain the best execution price for the customer, raising ethical questions. Purchasers and internalizers of order flow in the market may cause prices quoted on the NYSE to deteriorate, making all investors worse off.
KeywordsPayment for order flow Madoff Broker execution Internalization
Unable to display preview. Download preview PDF.
We would like to thank participants at the 2006 University of Notre Dame Ethical Dimensions in Business Conference, a referee, and Ann Tenbrunsel (editor) for helpful suggestions. Kim Lorenzen provided helpful research assistance.
- Boehmer, E., R. Jennings and L. Wei: 2007, ‹Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing,’ Review of Financial Studies 20, 316–358Google Scholar
- Doyle, J. M.: 1993, ‹Paying for Stock Orders: Bribery or Competitive Edge?’ (The Associated Press, 16 May)Google Scholar
- ‹How Street Turns Trades into Gold.’ Wall Street Journal 16 February, 1993Google Scholar